The average Chapter 7 bankruptcy only takes a few months before you get a fresh start. But even in that time, the unforeseeable can sometimes happen — such as a car accident. If you’re in a car accident, you could end up receiving money, or you could have a claim against another party. On the other hand, you could end up owing money or having claims filed against you. Either scenario could affect an ongoing Chapter 7 bankruptcy. This article discusses each of those potential situations, the possible consequences for your Chapter 7 case, and your options for making the most of your bankruptcy in either scenario.
Written by Attorney Paige Hooper.
Updated September 22, 2022
Chapter 7 Bankruptcy Basics
To understand how a car accident could affect your Chapter 7 case, it helps to know a few essentials about Chapter 7 bankruptcy.
Your Assets Make Up Your “Bankruptcy Estate”
Under bankruptcy law, all the money, property, and other assets you own at the moment you file bankruptcy make up your bankruptcy estate. Your estate also includes any existing claims you have against a person or company. A claim is when someone owes or may owe you money or other compensation.
You Can Use Exemptions To Protect Your Assets
Bankruptcy exemptions allow you to protect some or all of your estate from liquidation. Most Chapter 7 debtors can claim their entire estate as exempt.
If your bankruptcy estate contains non-exempt assets, the trustee will sell those assets and distribute the proceeds among your creditors. Any remaining unpaid debt like credit card debt and medical bills will generally be wiped out by the bankruptcy discharge. You’re no longer responsible for paying debts that are discharged in bankruptcy.
What’s Not Included in the Bankruptcy Estate and Discharge?
As a general rule, any assets you receive or claims that arise after you file bankruptcy are not part of your bankruptcy estate. Though there are a few exceptions related to gifts, inheritances, life insurance proceeds, and divorce settlements. Likewise, as a general rule, any debts you incur or claims that arise against you after you file bankruptcy can’t be included in the bankruptcy discharge.
For the most part, these general rules govern how a car accident will affect your Chapter 7 bankruptcy filing, but there can be exceptions. If you have a car accident while your Chapter 7 bankruptcy is ongoing and you have a bankruptcy attorney, notify them right away. If you don’t have a bankruptcy lawyer, notify your bankruptcy trustee.
If you filed Chapter 13 bankruptcy, you should contact your bankruptcy attorney to sort out the details of your case and figure out how this will affect your repayment plan.
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What if I Receive Money as a Result of the Accident?
If you’re in an auto accident, you might be entitled to receive some compensation, especially if the accident was someone else’s fault. How this affects your bankruptcy depends on the type of claim or compensation involved.
Money From Your Insurance Company To Repair Your Car
If the accident damaged your car, you may receive money from your car insurance company to repair the damage. Because the accident occurred after you filed bankruptcy, you had no claim to this money at the moment you filed your Chapter 7 bankruptcy petition. As a result, this money isn’t part of your bankruptcy estate, and the Chapter 7 trustee can’t take it to benefit your creditors.
What if I Still Owe on My Car?
When your insurance company pays for car repairs, it usually doesn’t matter whether you still owe on your car. The exception is when your car is declared a total loss. A car is usually considered a total loss when the cost to repair the car is higher than car’s market value.
In a total loss situation, your insurance company is usually required to pay the car’s value rather than the repair cost. If you still owe on your car, your insurance company is usually required to send the money to your lender first. If you have a pending Chapter 7 case in bankruptcy court, these funds may need to go through the bankruptcy trustee.
What You Should Know About Voluntary Surrender and Reaffirmation Agreements
Occasionally, this money isn’t enough to pay off your whole car loan, especially if you owe more than your car is worth. Fortunately, you can amend your bankruptcy paperwork to surrender the car. Even though the accident happened after you filed bankruptcy, your car loan existed before you filed bankruptcy. As a result, you can probably discharge the remaining loan balance in your bankruptcy case.
That said, if you signed a reaffirmation agreement with your auto lender as part of your bankruptcy, you could still be on the hook for the remaining loan balance. When you reaffirm a secured debt like a car loan, that debt isn’t included in your bankruptcy discharge.
Under the Bankruptcy Code, you can cancel a reaffirmation agreement anytime before your discharge order is entered or within 60 days after the reaffirmation agreement is filed with the court, whichever is later. If the agreement was filed with the court fewer than 60 days before your discharge, you can still reopen the case and rescind (cancel) the agreement. To rescind a reaffirmation agreement, you must notify the creditor in writing.
Money From Your Insurance Company for Medical Bills
Because the accident happened after your bankruptcy was filed, any accident-related injuries or treatment also occurred after the bankruptcy was filed. As a result, any money you receive to pay for medical treatment or equipment is not a part of your bankruptcy estate. But this also means that any accident-related medical bills that remain unpaid can’t be included in your bankruptcy discharge (more about that later).
Money From Another Party
After a car accident, you could have property damage or a personal injury case against someone else, such as the other driver or your car’s manufacturer. Because your claims arose from an accident that occurred after you filed bankruptcy, these claims are not a part of your bankruptcy estate. The trustee can’t take any money you might eventually receive from claims in a personal injury lawsuit or a claim for property damage.
Be aware, though, that you may have to use some of the money you receive from a personal injury claim to pay medical bills that resulted from the accident. Depending on your state’s laws, your medical providers may have a lien against any funds you receive.
What if I Owe Money as a Result of the Accident?
A car accident could also result in you owing money, especially if the accident was deemed your fault. You could be responsible for your medical bills if they weren’t covered by insurance. You could also be sued for another person’s injuries or damage to another person’s car as a result of the accident.
Because the accident and all resulting debts and claims occurred after you filed bankruptcy, these debts and claims can’t be included in your bankruptcy discharge. In other words, you’ll still owe them after your bankruptcy is complete. This means you might walk away from your bankruptcy owing more than when you started. There are a few options that might help you avoid this.
Filing Another Bankruptcy Later
If a car accident during your bankruptcy leaves you with unaffordable debt after your bankruptcy is complete, one option is to file another bankruptcy later. If you got a discharge in your Chapter 7 bankruptcy, though, you’ll be subject to some waiting periods.
Under the Bankruptcy Code, after a Chapter 7 discharge, you can’t get a discharge in another Chapter 7 bankruptcy until eight years have passed, and you can’t get a discharge in a Chapter 13 case until six years have passed.
The waiting period is calculated from the date you filed the first bankruptcy to the date you file the second bankruptcy. While you can still file another bankruptcy before the waiting period has passed, you won’t be eligible for a discharge in the new bankruptcy.
Dismissing Your Bankruptcy Case
Another option to avoid being stuck with accident-related debt after you file Chapter 7 bankruptcy is to try dismissing your Chapter 7 case. The Bankruptcy Code doesn’t give you an absolute right to dismiss a Chapter 7 bankruptcy, so you’ll need to file a motion and get the court’s permission to dismiss your case. You may not be able to dismiss your case if:
Your bankruptcy estate includes non-exempt assets,
Your creditors object, or
Your accident-related debts won’t be dischargeable in a later case (more on that in the next section)
After your case is dismissed, you can file another bankruptcy. Because the accident happened before the new case was filed, any accident-related debts can be included in the discharge.
You can file a new bankruptcy case anytime after the first case is dismissed. But if you let your case get dismissed — say, for failing to attend your meeting of creditors — instead of filing a motion to dismiss, you must wait 180 days before re-filing. Also, if you file a new bankruptcy within a year after the dismissal, the automatic stay in the new case will be limited to 30 days. You can file a motion in the new case to extend the stay.
Non-Dischargeable Debts Arising from an Accident
A car accident during your Chapter 7 bankruptcy could leave you with debt. Filing another bankruptcy after discharge or dismissal could wipe out the accident-related debt. But there is an important exception.
Accident-related debts can’t be discharged in bankruptcy, no matter when you file, if:
The accident happened because you were driving under the influence of drugs or alcohol (also known as a DUI or drunk driving), or
The accident was caused by your intentional misconduct.
If you have a car accident during your Chapter 7 case, you could end up either receiving or owing money. Money you receive after you file bankruptcy usually doesn’t become a part of your bankruptcy estate. This includes money you receive to pay medical bills as well as money you receive to repair your car. If your car is a total loss and you still owe on it, you can usually wipe out the loan with your bankruptcy discharge.
Debts arising from an accident that occurs after you file bankruptcy can’t be included in your bankruptcy discharge. If you can’t afford these debts, you can file bankruptcy again but you must wait 6–8 years. You could also try to dismiss your bankruptcy and then file a new bankruptcy. If the accident was caused by your misconduct, including driving while impaired, you can’t use bankruptcy to eliminate accident-related debts.
If you aren’t sure how to deal with an accident that happens during your Chapter 7 case, we can help connect you with a qualified attorney for a free consultation.